Cybertron International, Inc. v. Capps

NOT DESIGNATED FOR PUBLICATION
No. 122,439
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
CYBERTRON INTERNATIONAL, INC.,
Appellee/Cross-Appellant,
v.
MICHAEL CAPPS,
Appellant/Cross-Appellee.
MEMORANDUM OPINION
Appeal from Sedgwick District Court; DEBORAH HERNANDEZ MITCHELL, judge. Opinion filed
January 14, 2022. Affirmed in part and dismissed in part.
Martin J. Peck, of Wellington, for appellant/cross-appellee.
Michael L. Baumberger, of Klenda Austerman LLC, of Wichita, for appellee/cross-appellant.
Before ARNOLD-BURGER, C.J., SCHROEDER, J., and RICHARD B. WALKER, S.J.
SCHROEDER, J.: Michael Capps was the cofounder and coowner of Integrated
Technologies of Kansas (ITK). In 2015, Capps and his business partner sold ITK to
Cybertron International, Inc. (Cybertron), for which Capps was given cash and Cybertron
stock and was hired by Cybertron. He entered into a restrictive covenant agreement
(RCA) with Cybertron, which contained noncompete, nondisclosure, and nonsolicitation
clauses, as well as a liquidated damages clause, providing for $50,000 in damages for
each breach of the RCA. Cybertron later terminated Capps' employment. Thereafter,
Cybertron filed suit against Capps, alleging 11 breaches of the RCA and seeking a total
of $550,000 in liquidated damages.
1
The district court found in Cybertron's favor on 3 of its 11 claims, awarding
$50,000 for each. The district court did not individually grant judgment on the eight
remaining claims but essentially aggregated the damages for all other breaches and
awarded Cybertron an additional $50,000. In total, the district court awarded Cybertron
$200,000 and any applicable postjudgment interest, attorney fees, and costs. But the
district court denied Cybertron's request for prejudgment interest.
Capps timely appeals, arguing the liquidated damages provision is invalid as a
matter of law because it encompasses too broad a range of conduct for the liquidated
damages figure to be reasonable in relation to the various breaches that could occur.
Cybertron cross-appeals, arguing the district court should have awarded $50,000 for each
of the eight remaining breaches and further asserts it is entitled to prejudgment interest.
Capps argues Cybertron waived its right to cross-appeal by initiating garnishment
proceedings. Cybertron argues Capps waived his right to appeal because he did not post a
supersedeas bond and approximately $3,000 has been paid on the judgment through
garnishments issued by Cybertron.
We find Cybertron waived its right to cross-appeal by aggressively pursuing
garnishment proceedings against Capps. Accordingly, we dismiss Cybertron's cross-
appeal. However, we find Capps did not waive his right to appeal because his actions or
inactions with respect to Cybertron's garnishment efforts were not voluntary and do not
show he acquiesced in the judgment. But we find the majority of Capps' substantive
arguments unpersuasive. Here, the liquidated damages clause is not an invalid penalty
provision; therefore, it is enforceable. Thus, we affirm the district court's award of
$200,000 plus costs, attorney fees, and postjudgment interest to Cybertron.
2
FACTS
In September 2015, Cybertron purchased customer lists, existing customer
contracts, and accounts receivable from one of its competitors, ITK, which was owned by
Capps and Garland Egerton. Capps was paid an initial sum of cash and was given
Cybertron stock. He further agreed to accept additional monthly payments from
Cybertron to ITK and was hired by Cybertron as its vice president of technology services.
Capps also entered into a 60-month RCA with Cybertron beginning September 1, 2015,
which contained, among other things, noncompete, nondisclosure, nonsolicitation, and
liquidated damages clauses. In relevant part, the RCA provided:
"4. Covenant Not to Compete. By the execution hereof, [Capps] agree[s] that,
during the Term, [Capps] shall not, directly or indirectly, own, have a proprietary interest
in, be engaged by or serve as a consultant to, or in any other capacity for, or establish any
business relationship with, any firm, individual, partnership, joint venture, corporation,
limited liability company, or other entity whatsoever, of whatever nature which shall in
any means or manner be engaged in the information technology services business,
including consulting, systems integration, website design and hosting, software
development and voice over Internet protocol solutions and the computer hardware
manufacturing and sales business within any area or market that [Cybertron] is actively
selling or doing business in. . . .
"5. Non-Disclosure of Confidential Information. During and after the Term,
unless authorized in writing by [Cybertron], [Capps] shall not disclose any Confidential
Information of [Cybertron] or of [Cybertron's] affiliates, including, without limitation,
that which relates to (i) the Assets; (ii) the Assumed Liabilities; and/or (iii) the Business
that [Cybertron] purchased pursuant to the Purchase Agreement to any person or entity,
nor shall [Capps] use the same for any purpose at any time. . . .
"6. Non-Solicitation. During the Term, [Capps] shall not (i) contact, for the
purpose of competitive business solicitation, any person who is a supplier, vendor,
employee, consultant, prospect, customer or client of [Cybertron] or an affiliate of
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[Cybertron], or (ii) contact any employee or executive of [Cybertron] or an affiliate of
[Cybertron] for the purpose of offering him or her employment with any person other
than [Cybertron].
....
"8. Liquidated Damages. [Capps] agree[s] that any breach of the covenants or
agreements contained in Sections 4, 5 and 6 shall cause irreparable injury to [Cybertron]
and its affiliates for which there is and shall be no adequate remedy at law. [Cybertron]
shall be entitled, as liquidated damages from [Capps], to Fifty Thousand United States
Dollars (US$50,000) for each breach in addition to all other remedies, including, without
limitation, injunction remedies. . . ."
In June 2016, Capps' employment with Cybertron was terminated. Shortly
thereafter, a competitor, Century Technology Solutions (Century), which was owned by
Chase Davis, acquired six of Cybertron's customers with whom Capps had previously
worked while employed at Cybertron. Capps admitted he provided "business coaching"
to Davis in 2016 and later became an employee of Century in 2017. Capps provided
Davis with advice regarding business financing, LLC formation, business management,
and the use of Quickbooks software for finance and accounting purposes. Capps also
believed it was possible Davis may have asked for advice on pricing of services and
equipment, but Capps could not recall any specifics.
In August 2016, Capps referred Davis to Reflexion, a company that provides
email, antivirus, and various other computer security services. Capps previously had a
relationship with Reflexion while at ITK. Following Capps' referral, Davis became a
customer of Reflexion for email security services. In October 2016, Capps referred Davis
to Nick Ryan, who worked with Cox Communication's agent program. Capps was aware
that if Davis referred Century's customers to Cox, Davis could potentially receive a
referral fee under the agent program. However, Capps was unaware if Davis ever entered
into an agreement with Cox or received any money under the referral program.
4
In January 2017, Capps referred Davis to Glenda Alcantar of Fidelity Bank so
Davis could obtain the necessary bank accounts and services for Century. Capps was
trying to help Davis separate his personal and business banking needs as Davis had
reorganized Century from a sole proprietorship to a limited liability company—CTS,
LLC—in December 2016. Around that time, Capps had been in contact with Kathi
Buche, an employee of one of Cybertron's customers, Envision. Buche told Capps that
Envision was having issues with its Mac computers. Davis subsequently sent Buche an
email stating Capps told him Envision may have need for ongoing Mac support.
In March 2017, Capps became an employee of CTS as its business development
manager, a role in which he provided management and consulting services for CTS's
customers. But Capps spent the majority of his time keeping track of CTS's finances and
accounts because the business had grown to the point Davis could no longer do so alone.
On March 17, 2017, Capps sent an email from his CTS email address to Elizabeth
Harshfield, the owner of Exhibit Arts, stating: "It's been a while since we've had a
chance to catch up on life and business," and asking whether Harshfield "had any time
next week [Capps] could drop by and say hello." Capps denied the purpose of his email
was to solicit business from Exhibit Arts. However, Harshfield stated: "It was [her]
interpretation [Capps] was no longer working for Cybertron and he had gone into
business with someone else or something else and wanted to talk to [Exhibit Arts] about
it." Capps emailed Whit Hickman of American Bonanza Society (ABS) the same day,
informing Hickman he had joined CTS and inquired whether Hickman was available to
visit with him the next week. Capps admitted he intended to solicit ABS's business for
CTS.
Cybertron filed suit against Capps, Davis, CTS, and Aaron DeHaven, a former
employee of ITK and Cybertron who later worked for Davis. However, none of the other
5
named defendants are parties to this appeal. Specific to Capps, Cybertron alleged he
committed 11 violations of the RCA by:
• Providing advice to Davis and Century/CTS regarding business finance, LLC
formation, pricing models, and business management issues (Counts 1-4);
• referring Davis to Reflexion, Cox, and Fidelity Bank to provide services for
Century/CTS (Counts 5-7);
• obtaining employment with Century/CTS, a competitor of Cybertron, in
violation of the noncompete clause (Count 9); and
• soliciting or attempting to solicit business from Cybertron's customers—
Envision, Exhibit Arts, and ABS—on behalf of CTS (Counts 8, 10, and 11).
Following a bench trial, the district court found three violations of the RCA—
Capps becoming an employee of CTS, and Capps soliciting business from Exhibit Arts
and ABS on behalf of CTS. The district court awarded Cybertron liquidated damages of
$50,000 for each of those violations. Regarding Capps' contact with Envision, the district
court found there was an exchange of emails and other communication between Capps,
Davis, and Buche, but Buche had not testified at trial and it was unclear "from the emails
as to who contacted who." Therefore, the district court declined to award liquidated
damages for Count 8 on its own.
As to Counts 1 through 4, the district court found any advice Capps gave Davis
regarding business management issues was not proprietary information and there was
nothing "discussed that . . . provided . . . or could have provided any detriment to
Cybertron, so there will be no liquidated damages provided for that." As to Capps
introducing Davis to Cox, the district court found: "[T]he testimony [was] vague on who
contacted Cox or what exactly Cox did and who contacted who. So there won't be . . .
$50,000 damages just for that." With regard to Capps referring Davis to Fidelity Bank,
6
the district court stated: "[T]hat's the same thing as banking issues that were gone
through in [Counts] one through four and so I will not be [awarding] $50,000 for that."
While it expressly declined to individually award Cybertron liquidated damages
for Counts 1 through 8, the district court found that, in the aggregate, those violations
showed: "Mr. Capps provided consultation to CTS and to Mr. Davis to make his
business successful. All of those put together and so there will be a $50,000 liquidated
damages provision that will be assessed against Mr. Capps for that."
In total, the district court ordered Capps to pay Cybertron $200,000 in liquidated
damages as well as attorney fees and postjudgment interest. The district court denied
Cybertron's request for prejudgment interest because the RCA did not provide for it. The
district court further acknowledged Capps had argued the liquidated damages clause was
an invalid penalty provision and, therefore, unenforceable, but concluded: "The
liquidated damages amount of $50,000 is more than reasonable and the liquidated
damages provision is not a penalty." Capps timely appealed. Cybertron timely cross-
appealed. Additional facts are set forth as necessary herein.
ANALYSIS
The primary issue for us to resolve is quite straightforward: Is the liquidated
damages clause invalid as a matter of law? As later explained herein, we find the
liquidated damages clause valid and enforceable. Next, we must decide whether
Cybertron waived its right to cross-appeal by initiating garnishment proceedings against
Capps, because Cybertron claims it is entitled to additional liquidated damages and
interest under the RCA. Because the issues on appeal and cross-appeal—or the necessity
to address them—stem from Capps' challenge to the liquidated damages clause on its
face, we must also decide whether Capps waived his right to appeal by failing to stay
execution of the judgment.
7
Standards of Review and Applicable Legal Principles
Waiver or Acquiescence
"Acquiescence to a judgment cutting off the right of appellate review occurs when
a party voluntarily complies with a judgment by assuming the burdens or accepting the
benefits of the judgment contested on appeal. A party that voluntarily complies with a
judgment should not be allowed to pursue an inconsistent position by appealing from that
judgment. [Citations omitted.]" Alliance Mortgage Co. v. Pastine, 281 Kan. 1266, 1271,
136 P.3d 457 (2006); Heartland Presbytery v. Presbyterian Church of Stanley, Inc., 53
Kan. App. 2d 622, 635, 390 P.3d 581 (2017). Whether a party acquiesced to a judgment
involves jurisdiction, which is a question of law subject to unlimited review. Alliance
Mortgage Co., 281 Kan. at 1271; Security Bank of Kansas City v. Tripwire Operations
Group, 55 Kan. App. 2d 295, 300, 412 P.3d 1030 (2018).
Contract Interpretation
An appellate court exercises unlimited review over the interpretation and legal
effect of written instruments and is not bound by the lower court's interpretations or
rulings. Born v. Born, 304 Kan. 542, 554, 374 P.3d 624 (2016). Whether a restrictive
covenant is void for being contrary to public policy is a question of law, and an appellate
court's review of that question is also unlimited. Varney Business Services, Inc. v.
Pottroff, 275 Kan. 20, 39, 59 P.3d 1003 (2002).
"'The primary rule for interpreting written contracts is to ascertain the parties'
intent. If the terms of the contract are clear, the intent of the parties is to be determined
from the language of the contract without applying rules of construction. [Citations
omitted.]'" Peterson v. Ferrell, 302 Kan. 99, 104, 349 P.3d 1269 (2015). However,
8
"'[a]n interpretation of a contractual provision should not be reached merely by isolating
one particular sentence or provision, but by construing and considering the entire
instrument from its four corners. The law favors reasonable interpretations, and results
which vitiate the purpose of the terms of the agreement to an absurdity should be
avoided.' [Citations omitted.]" Waste Connections of Kansas, Inc. v. Ritchie Corp., 296
Kan. 943, 963, 298 P.3d 250 (2013).
Discussion
Cybertron has waived its right to cross-appeal.
We find Cybertron has waived its right to cross-appeal by aggressively pursuing
collection on its judgment through garnishment proceedings. In doing so, Cybertron has
accepted the benefits of the judgment and, therefore, acquiesced to it. Cybertron has
obtained multiple garnishment orders, requesting garnishment of Capps' wages as well as
funds held in Capps' bank accounts, seeking amounts not to exceed between $215,000
and $236,500. This garnishment figure exceeds the district court's total award of
$200,000, although the additional amount generally accounts for costs, attorney fees, and
postjudgment interest. As provided by K.S.A. 2020 Supp. 60-733, a garnishment order
cannot exceed 110% of the total judgment. The portion of the judgment Cybertron claims
it agrees with is $150,000, but its requests for garnishment are well in excess thereof.
Contrary to the arguments in its reply brief, Cybertron has not limited its efforts in
collecting on the judgment to only those portions of the judgment it agrees with. There is
no distinction as to the amount and identity of the funds Cybertron sought and collected
and the claims to which they relate. Cybertron has tried to collect on the full judgment as
it now exists and taken steps beyond merely protecting its judgment. It cannot now take
an inconsistent position on appeal by arguing the district court's judgment was incorrect.
See Alliance Mortgage Co., 281 Kan. at 1271.
9
In Almack v. Steeley, 43 Kan. App. 2d 764, 775, 230 P.3d 452 (2010), the majority
of the panel held the judgment creditor waived its right to appeal by commencing
proceedings in aid of execution on the judgment. The Almack majority correctly noted:
"The test for acquiescence is whether the position taken by the party on appeal is
inconsistent with the judgment." 43 Kan. App. 2d at 770; see Younger v. Mitchell, 245
Kan. 204, 206, 777 P.2d 789 (1989). The ultimate decision of the Almack majority
appears somewhat beyond the typical boundaries Kansas appellate courts have applied in
deciding whether a party has waived its right to appeal. Nevertheless, the Almack
majority provided a thorough framework and useful historical overview of the waiver
doctrine as applied by our appellate courts. 43 Kan. App. 2d at 770-75.
In contrast to Almack, the panel in Uhlmann v. Richardson, 48 Kan. App. 2d 1, 17-
18, 287 P.3d 287 (2012), held a judgment creditor did not waive its right to appeal merely
by issuing garnishment orders because it did not collect any money to apply on the
judgment. Rather, the purpose of issuing the garnishment orders was to compel the
judgment debtor to post an appeal bond, thereby providing security to the judgment
creditor while the appeal was pending. However, the Uhlmann panel indicated the
judgment creditor would have waived its right to appeal had it collected on the judgment
through garnishment. But Uhlmann found the judgment debtor would not have waived its
right to appeal had funds been garnished because any such action would have been
involuntary. 48 Kan. App. 2d at 17-18.
Uhlmann draws a reasonable line at the judgment creditor's collection of payment
on the judgment as the threshold for acquiescence. As our Supreme Court noted in
McDaniel v. Jones, 235 Kan. 93, 103, 679 P.2d 682 (1984):
"'A party who enforces payment or satisfaction of a judgment or decree in his
favor, by suing out execution or otherwise, generally waives his right to bring or
prosecute an appeal or writ of error, although the execution was ordered under a
10
misapprehension, for which appellee was not responsible. Under this general rule a right
of appeal is waived, even though appellant claims that the judgment is for less than he
was entitled to recover, unless there is a statutory provision to the contrary. . . .
"'However, the right to appeal or bring error is not waived where the judgment or
decree is of such a character, or the circumstances are such, that there is no inconsistency
between such enforcement and the appeal or proceeding in error . . . .'" 235 Kan. at 103(quoting 4 C.J.S., Appeal and Error § 220).
Although Cybertron indicated at oral argument it had collected roughly $3,000,
the extent to which it has successfully collected on the judgment is not determinative.
The fact is Cybertron sought garnishment for the full amount of the judgment—$200,000
plus interest and fees. That judgment represents three awards of $50,000 in full, and the
other $50,000 is effectively an aggregation by the district court of Cybertron's eight
remaining claims. In other words, the $200,000 judgment upon which Cybertron has
collected in part through garnishment encompasses all of Cybertron's claims. Thus, the
judgment is not "'of such a character . . . that there is no inconsistency between such
enforcement [of the judgment] and the appeal . . . .'" 235 Kan. at 103.
While Cybertron may have collected far less than the judgement granted, and less
still than what it claims it is entitled to, there is no way to distinguish the identity of the
funds collected and the claim(s) to which they apply based on the garnishment orders
Cybertron obtained. Had Cybertron limited its collection efforts to only the portion of the
judgment it agrees with—$150,000 for three breaches in full—this analysis could be
different. See 235 Kan. at 103. But Cybertron's actions here are similar to another
example of waiver cited in McDaniel:
"'A mortgagee cannot appeal from a judgment or decree of foreclosure, after
judgment or decree has been satisfied, by his causing a sale to be made of the mortgaged
premises thereunder. In such a case the mortgagee waives his right to appeal from that
11
part of the decree which gives judgment for a less sum than is claimed to be due . . . .'"
235 Kan. at 103 (quoting 4 C.J.S., Appeal and Error § 221).
Cybertron's primary complaint is the district court failed to award judgment in full
for each of its eight remaining claims. In effect, Cybertron does not dispute the district
court's determination Capps committed various breaches of the RCA and Cybertron is
entitled to some amount of liquidated damages; rather, Cybertron takes issue with the
manner and extent to which those points were resolved in its favor below. In a largely
analogous context, the panel in Hemphill v. Ford Motor Co., 41 Kan. App. 2d 726, 728-
29, 206 P.3d 1 (2009), held a judgment creditor waived its right to appeal the resolution
of its claim in arbitration where it accepted payment for the arbitration award. Simply
put, Hemphill stands for the proposition that how the judgment was decided cannot be
appealed by a party who accepts the benefit of that judgment by collecting payment
thereon. See 41 Kan. App. 2d at 728-29.
We agree with the reasoning in Hemphill and believe the same rationale precludes
Cybertron from appealing the district court's decision to aggregate eight of its claims into
a single liquidated damages award. Cybertron's garnishment requests, upon which it has
collected in part, include the totality of the district court's award—three awards for
breaches in full, a single aggregated award for the eight remaining breaches,
postjudgment interest, and fees.
In its cross-appeal, Cybertron also asserts it is entitled to prejudgment interest.
Cybertron has availed itself of the benefit of the full judgment below in its collection
efforts, including applicable interest and fees. We cannot allow Cybertron to take an
inconsistent position on appeal by seeking additional liquidated damages and interest. See
McDaniel, 235 Kan. at 103.
12
We note other decisions from our appellate courts holding there is a "protective
measure exception" to the doctrine of waiver by acquiescence. Alliance Mortgage Co.,
281 Kan. at 1271-72 (purchasers of property in foreclosure sale did not waive right to
appeal by accepting redemption funds because failure to accept funds would have
subjected buyers to unnecessary interest payments on loan used to finance purchase); see
Uhlmann, 48 Kan. App. 2d at 17-18 (judgment creditor did not waive appeal by obtaining
garnishment orders without collecting payment in order to compel judgment debtor to
post appeal bond).
Here, however, Cybertron could have taken, and did take, other measures to
protect its judgment. Notably, Cybertron requested and obtained a declaratory judgment
from the Federal Bankruptcy Court, holding Capps' obligations and liability under the
RCA were not discharged as a result of his bankruptcy filing. See In re Capps, No. 16-
10141, 2018 WL 3635708, at *1 (Bankr. D. Kan. 2018). Cybertron also admitted at oral
argument it was able to repurchase, through bankruptcy proceedings, the shares of stock
it provided to Capps when it purchased ITK. In short, Cybertron was able to prevent any
additional harm through further delay by taking its own securities off the table as a
potential source of funds to satisfy the judgment here, or as a transferrable asset or
liability to or from any third party to whom Capps might be indebted as a result of other
legal matters. We find this action in the bankruptcy proceedings by Cybertron was not an
attempt to collect on its judgment but one to protect its judgment. See Uhlmann, 48 Kan.
App. 2d at 17-18.
While Cybertron may have hoped to further protect itself by issuing garnishment
orders to leverage Capps into posting an appeal bond, the parties agree Capps did not do
so. When Cybertron then proceeded to collect on the judgment through multiple
garnishments, it crossed the line from protecting its judgment to availing itself of the
benefits of the judgment. See McDaniel, 235 Kan. at 103; Uhlmann, 48 Kan. App. 2d at
17-18. The only conceivable protective measure served by Cybertron's decision to collect
13
on the judgment through garnishments was to prevent bankruptcy creditors in a separate
proceeding from exhausting Capps' assets before Cybertron could collect as a judgment
creditor in this case. However, Cybertron has failed to argue the point, and, therefore,
waived and abandoned any such claim. See In re Marriage of Williams, 307 Kan. 960,
977, 417 P.3d 1033 (2018). In very plain terms, Cybertron voluntarily obtained
garnishments on Capps' assets to collect its judgment as it now exists.
When we "consider acquiescence for what it is—an implied waiver of rights[,]"
Uhlmann, 48 Kan. App. 2d at 17, Cybertron has waived its right to cross-appeal based on
its multiple collection activities on the judgment through garnishment. Accordingly, we
must dismiss Cybertron's cross-appeal. See Alliance Mortgage Co., 281 Kan. at 1271.
Capps has not waived his right to appeal.
Capps has not waived his right to appeal by failing to stay execution on the
judgment. A party may acquiesce to a judgment by making payments and, therefore,
accepting the burdens of the judgment. See Harsch v. Miller, 288 Kan. 280, 292, 200
P.3d 467 (2009). But the test for acquiescence is whether the party acted voluntarily.
Varner v. Gulf Ins. Co., 254 Kan. 492, 497, 866 P.2d 1044 (1994); Security Bank of
Kansas City, 55 Kan. App. 2d at 300. Here, although Capps did not post an appeal bond,
he did not act voluntarily insofar as Cybertron successfully garnished his wages. It was
by Cybertron's initiative—despite its claim on cross-appeal the district court's judgment
was incorrect—that Capps' wages were garnished. Capps did not act voluntarily; rather, a
third party—Capps' employer—withheld a portion of his wages pursuant to a
garnishment order obtained by Cybertron. This does not show Capps intended to waive
his legal rights. See Varner, 254 Kan. at 497; Uhlmann, 48 Kan. App. 2d at 17-18. Capps'
appeal is properly before us, and we will address his arguments on the merits.
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The liquidated damages clause is valid and liquidated damages were appropriate
given the nature of the claims at issue.
Capps argues the liquidated damages clause is an invalid penalty provision;
therefore, the entire judgment must be reversed. Alternatively, Capps argues the
liquidated damages provision cannot validly apply to any of the alleged violations other
than his acceptance of employment at CTS because Cybertron's damages for the other 10
violations were easily calculable and no evidence was presented showing Cybertron
suffered any actual loss as a result thereof.
Liquidated damages provisions in contracts are permissible; penalty provisions are
not. "The distinction between a contractual penalty and a provision for liquidated
damages is that a penalty, in effect, is a security for performance, while a provision for
liquidated damages requires a sum certain to be paid in lieu of performance. [Citation
omitted.]" Carrothers Constr. Co. v. City of South Hutchinson, 288 Kan. 743, 754-55,
207 P.3d 231 (2009). A liquidated damages provision is valid "(1) if the amount is
reasonable in view of the value of the subject matter and of the probable and presumptive
loss in case of breach, and (2) if the amount of actual damages in case of breach would
not be easily and readily determinable." White Lakes Shopping Center, Inc. v. Jefferson
Standard Life Insurance Co., 208 Kan. 121, 127-28, 490 P.2d 609 (1971).
Our Supreme Court has long held liquidated damages provisions are invalid and
amount to an unlawful penalty provision where a "fixed . . . sum . . . cover[s] all or any
damages which might result from a breach of the contract." Condon v. Kemper, 47 Kan.
126, 135-36, 27 P. 829 (1891); see Kansas City v. Industrial Gas Co., 138 Kan. 755, 762-
63, 28 P.2d 968 (1934) ("'Contracts are frequently made in which performances of very
different degrees of importance and value are promised and one large sum of money is
made payable as damages for any breach whatever. Since such a contract promises the
same reparation for the breach of a trivial or comparatively unimportant stipulation as for
15
the breach of the most important one or of the whole contract, it is obvious that the
parties have not adhered to the rule of just compensation. In this matter neither the
intention of the parties nor their expression of intention is the governing consideration.
The payment promised may be a penalty, though described expressly as liquidated
damages, and vice versa.'") (quoting Restatement of Contracts § 339 [1], comment b); see
also Heatwole v. Gorrell, 35 Kan. 692, 696, 12 P. 135 (1886) ("[W]here an absolute sum
is fixed in a contract as a security against all breach or breaches of the contract, without
reference to the magnitude of the breaches or the number thereof, and without reference
to the amount of the actual damages which might ensue from such breach or breaches,
whether great or small, and . . . where there might be several breaches, . . . each of a
greater or less magnitude, and each followed by greater or less damages, such fixed sum
cannot be considered . . . liquidated damages, but must be considered as a penalty.").
But, in Carrothers, our Supreme Court expressly rejected a retrospective
comparison of liquidated damages with actual damages to determine whether the amount
is reasonable. Under Carrothers, we can only engage in a prospective analysis as of the
time of contract formation to determine (1) whether the actual damages for the breaches
specified in the contract would be easily calculable, and (2) whether the liquidated
damages figure is reasonable in relation to the harm(s) contemplated by the breaches. 288
Kan. at 754-55. Comparing actual damages after the fact frustrates the very purpose of
the clause by robbing the parties of the benefit of agreeing to liquidated damages. 288
Kan. at 758.
Here, Cybertron estimated liquidated damages based on the average cost of losing
one customer. Cybertron's CFO, Shadi Marcos, testified his liquidated damages
calculation was based on the standard 36-month service term for the typical Cybertron
customer, which, on average, has 10 IT service users. Cybertron typically charges its
customers $100 per month per user. Over the course of the service agreement, the typical
Cybertron customer would also have between $15,000 to $17,000 in computer and
16
equipment replacement costs. Therefore, expected revenues for Cybertron's existing
customers could be up to $53,000 over the life of the service agreement, which Marcos
rounded down to $50,000. Marcos further testified his liquidated damages calculation
was also based on the average revenue Cybertron expected to receive from the 35 new
customer contracts it acquired from ITK, which ITK told Cybertron was $50,000 every
month. Based on that figure, Marcos estimated each new customer would provide
Cybertron on average between $1,400 to $1,500 per month in revenue. Multiplying that
figure over the 36-month service term, Marcos estimated the loss of a former ITK
customer would also cost Cybertron approximately $50,000.
Capps argues Cybertron's liquidated damages estimate is problematic because it
was based on a singular possibility—Capps' breach of the RCA causing Cybertron to lose
a customer. But Marcos testified he also considered the possibility that certain violations
of the nondisclosure provision, such as sharing Cybertron's client list, could result in the
loss of more than one client. Marcos also considered the possibility that Cybertron's
actual damages could differ depending on the remaining length of any given customer's
service agreement. Still, these considerations relate to losing one or more clients.
Marcos further admitted he made no attempt to determine the likely damages, if
any, in the event Capps provided a competitor with informal advice about business
finance, LLC formation, pricing models, or other business management issues. Nor did
Marcos consider the likely damages, if any, in the event Capps referred a competitor to
Reflexion for email spam-filtering services; Cox for cable, internet, and/or telephone
service; or a banker for obtaining a business bank account. Marcos admittedly did not
analyze every possible type of violation that could occur under the RCA because "[t]here
[were] too many different possibilities."
Still, we are unpersuaded by Capps' argument the liquidated damages provision is
invalid. He focuses on the specifics of Cybertron's allegations rather than the nature of
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the conduct evidenced by those violations of the RCA. In doing so, he largely asks this
court to retrospectively compare Cybertron's actual damages from the breaches
specifically alleged to the liquidated damages figure, which we cannot do. See
Carrothers, 288 Kan. at 758.
We acknowledge the noncompete, nondisclosure, and nonsolicitation clauses of
the RCA relate to a wide range of conduct, some of which ultimately might not actually
cause Cybertron to lose a customer—the basis for the liquidated damages figure. For
example, Capps points out the liquidated damages clause makes no distinction between
the successful solicitation of a customer and the unsuccessful solicitation of a customer.
But this is irrelevant to whether the clause is valid. Viewed prospectively, the solicitation
of one of Cybertron's customers could reasonably result in the loss of a customer.
The nonsolicitation provision also prohibited Capps from contacting any vendor or
services provider used by Cybertron "for the purpose of competitive business
solicitation." Courts presume corporate actors make decisions on behalf of a corporation
with the corporation's best interests in mind. Kansas Heart Hospital v. Idbeis, 286 Kan.
183, 209, 184 P.3d 866 (2008). Where Cybertron relied on or contracted with certain
vendors for software, hardware, communications services, etc., it did so with the
corporation's best interests in mind. In other words, Cybertron would not have done
business with those vendors or service providers if it did not believe they offered
Cybertron a competitive advantage. Naturally, the importance of the nonsolicitation
provision's prohibition on Capps contacting those same vendors and providers for
business purposes was to prevent one of Cybertron's competitors from gaining the same
competitive business advantage as Cybertron, thus protecting against the loss of one or
more customers.
Here, for example, Cybertron alleged Capps violated the nonsolicitation provision
by referring Davis to Reflexion for email security and/or spam-filtering service.
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Contacting a specific vendor such as Reflexion could have given Davis a competitive
advantage insofar as Reflexion may have had proprietary software capable of providing a
distinct competitive advantage. There could be any number of other vendors offering
similar services of varying quality and price. Because Davis ran a competing business,
any such competitive advantage he might gain due to the quality and/or pricing of a
particular vendor's products or services could potentially lead to Cybertron losing a
customer. But it would be extremely difficult to determine to what extent using such
products or services could or would have improved Davis' business; thus, Cybertron's
actual damages would be difficult to calculate. Viewed prospectively, Capps referring
Davis to a specific vendor—here, Reflexion—reasonably falls within the scope of the
liquidated damages provision. See Carrothers, 288 Kan. at 754-55.
Further, by referring Davis to certain service providers—here, Reflexion, Cox, and
Fidelity Bank—Capps was helping a competing business in violation of the noncompete
provision. Just because the degree of assistance may not rise to the level of causing
Cybertron to lose a customer does not mean the act of assisting a competitor, viewed
prospectively, would not reasonably be likely to cause such a result. Comparing the
extent to which any given act actually assisted a competitor is akin to impermissibly
comparing liquidated damages with actual damages. See Carrothers, 288 Kan. at 758.
By helping Davis, Capps positioned one of Cybertron's competitors to succeed in
taking away Cybertron's customers, because any successful business will compete for the
greatest market share of customers seeking the types of products and services it offers.
Here, Davis' business offered substantially the same types of products and services to the
same types of customers as Cybertron within relatively the same geographical market.
However slight Cybertron's actual damages may have been is irrelevant. These were
actions taken by Capps to aid the owner of one of Cybertron's competitors. From the
parties' perspective as of the time of contract formation, such actions could reasonably
have been seen as likely to cause Cybertron to lose one or more customers.
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Here, the loss of a customer was the likely harm to result from a breach of the
noncompete, nondisclosure, and nonsolicitation provisions. Soliciting a customer would
naturally mean Capps (or anyone on whose behalf he made the solicitation) stood to
directly take away a customer from Cybertron. Similarly, if Capps violated the
noncompete agreement, it was also reasonably likely Cybertron could lose one or more
customers. Capps had been employed by Cybertron; therefore, he knew, or very likely
would have known, among other things: (1) The identity of Cybertron's customers; (2)
Cybertron's service, pricing, and business models; and (3) the types of products and
services Cybertron provided to its various customers and their individual business needs.
Armed with this information, Capps could easily enable a competitor to take away one or
more of Cybertron's customers.
A violation of the nondisclosure provision could also reasonably cause Cybertron
to lose one or more customers by revealing any of the following: Cybertron's customer
lists; Cybertron's product and service pricing information; Cybertron's financial
information; the vendors Cybertron used; and what Cybertron paid its vendors for their
products and services. Simply put, Capps was privy to a wealth of proprietary
information that, if disclosed, could allow a competitor to undercut Cybertron and take
away one or more of its customers.
The liquidated damages amount was appropriately calculated to reflect the average
cost of the loss of a Cybertron customer. But Cybertron's actual damages for any given
breach would not have been easily calculable because the value of the loss of one
customer could vary depending on how many IT users the customer had and what point
they were at in the life of their service contract with Cybertron. Also, a single violation of
the noncompete and/or nondisclosure provisions could cause the loss of multiple
customers. Here, the liquidated damages clause was appropriate in its scope and
application viewed prospectively from the time of contract formation, and the liquidated
damages amount was reasonable in proportion to the contemplated harm upon which it
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was based. See Carrothers, 288 Kan. at 754-55. The parties' agreement to liquidated
damages for violations of the RCA was proper, and the clause is valid on its face.
As to Capps' alternative argument, we find the point underdeveloped and
unpersuasive. He asserts actual damages were easily calculable for every violation other
than his acceptance of employment at CTS; therefore, the parties could not agree to
liquidate those damages. See White Lakes Shopping Center, Inc., 208 Kan. at 127-28. But
the only breaches that would have been readily determinable were Capps' unsuccessful
solicitations of Envision, Exhibit Arts, and ABS. Yet, as we have already held, the
success of Capps' solicitation of Cybertron's customers is irrelevant to the enforceability
of the nonsolicitation clause. The relevant contract provisions at issue were properly
bargained for and binding on the parties. Capps cannot disavow liability for his breaches
and the potential harm to Cybertron just because he failed to cause actual harm.
Cybertron's damages for any business advice Capps gave to Davis, as well as
referring Davis to Reflexion, Cox, and Fidelity Bank, would be difficult to measure. It
would be very difficult to determine to what extent, if any, each of those acts enabled
Davis to grow his business and compete with Cybertron, and whether by doing so, how
many customers, if any, Cybertron lost as a result. The liquidated damages clause is not
inappropriate as applied to those breaches. See Carrothers, 288 Kan. at 754-55.
Finally, in the interest of thoroughness, we note one point of concern with the
district court's ruling. The district court found Cybertron did not meet its burden of proof
to establish a breach under Counts 1 through 8 individually, but nevertheless aggregated
those alleged violations into a single judgment for $50,000. This appears inconsistent
with the plain language of the RCA, which provides for liquidated damages for "any
breach of the covenants." Effectively, the district court held Capps' actions constituted a
single course of conduct in violation of the noncompete provision. But in doing so, the
district court essentially rewrote the parties' contract and/or constructively amended
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Cybertron's claims by collectively granting a single liquidated damages award for
multiple breaches.
However, we have dismissed Cybertron's cross-appeal; thus, its argument on this
point is not properly before us. We also find nothing in Capps' briefing fairly challenging
the district court's action on this point, and Capps seems to admit the violation of Count
8—contact with Envision—on its own is sufficient to support the aggregated liquidated
damages amount for the alleged breaches under Counts 1 through 8. An issue not briefed
is deemed waived or abandoned. State v. Arnett, 307 Kan. 648, 650, 413 P.3d 787 (2018).
At best, the point is incidentally raised but not argued. But a point raised incidentally in a
brief and not argued therein is also deemed abandoned. Russell v. May, 306 Kan. 1058,
1089, 400 P.3d 647 (2017). And issues not adequately briefed are deemed waived or
abandoned. In re Marriage of Williams, 307 Kan. at 977. Based on Capps' failure to
properly address this point, we affirm the district court's full award of $200,000 plus
costs, attorney fees, and postjudgment interest to Cybertron.
Affirmed in part and dismissed in part.
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